How to go from Renter to Owner

Renters have been under increasing pressure this year as vacancy rates tighten and asking rents soar.

SQM Research revealed that rents are up more than 20% for the year so far as a national average, while vacancy rates have dipped to a historic low of 0.9%.

There looks to be no relief in sight for renters as inflation remains stubbornly high and costs of living climb steeply.

But the good news is that an easing of house price growth is underway, with some values down by up to 10% year on year, depending on where you are looking.

And, some savings accounts and term deposits are beginning to offer higher interest rates, which mean tenants may be able to get a deposit together quicker to purchase an asset.

Buying an investment property and receiving a rental income will mean they benefit from inflation rather than paying more of their own money to fund someone else’s portfolio.

Or if in a fringe market, being an owner occupier may mean paying less on a mortgage than they would otherwise be paying in rent each month, while accessing future equity growth to leverage into an investment.

Fringe markets

City fringes and regional areas are places that are the last to grow in price during a boom and the first to come off the boil when the market slows down. But the strong demand for affordable rentals can push local asking rents higher. That is why investors seeking a positive cashflow portfolio are often competing with first home buyers in those areas.

Those markets might offer positive cashflow opportunities because rents are higher than mortgage repayments and holding costs. So if you are renting in such an area, and can get yourself into a position to buy, you might find you are better off week to week, plus in a position where you can access the wealth created by future value growth.

People often want to become an owner occupier as quickly as they can, only to end up mortgaged to the hilt and struggling with rising repayments. By being an investor first and using an interest only loan, you may be able to boost your income and savings, while future equity growth can put you into a position to leverage into a permanent place of residence down the track, even if you have to keep paying rent in the meantime.

Just look at b Invested founder Nathan Birch, who spent years buying investment properties before using his gains to build his own dream home.

So how do you prepare yourself to go from renter to buyer?

You need to save a deposit, ideally at least 20% of the property’s value, to avoid lenders mortgage insurance.

Rent may be costing you a lot, but if you cut down on non-essential items, you will look responsible to a bank when you actually go to apply for a loan. These days, reasonable lenders will consider your rental payments as evidence of savings.

You want your bank statements to show at least three months’ worth of responsible saving and spending activity when you apply for a loan, and even longer if possible.

Get rid of your debt and liabilities

If you’ve got a credit card with debt on it, pay it off as soon as you can and then cut up the card. Banks consider a credit card limit the same way they consider debt already owed when assessing a loan. You may have never used a credit card, but if it’s got a $10,000 spending limit on it, that may be $10,000 less that you can borrow. 

Income security

You will need a steady income to service a loan. Lenders will want to see payslips, tax returns and other evidence of steady employment. If you are self-employed, they will often take an average of your last two years’ worth of income to work out how much you can borrow.

Lenders still use a 3% repayment buffer when assessing serviceability, even though rates have risen by close to 3% this year. They want to make sure you can meet repayments if rates rise further, so that’s something to be wary of.

Where there’s a bill…

Before you become an owner, be aware of the extra costs that will soon be in your life. All that maintenance, repair and other things that your landlord used to take care of will be yours to deal with. There are water bills, council rates, strata levies and various other holding costs to be aware of.

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